Euro Area Member States Research Articles

European Banking Union and the EU Single Financial Market: More Differentiated Integration, or Disintegration?

European Banking Union (EBU) provides an important new context in which to examine how differentiation affects integration. This chapter considers: (1) the short to medium term appeal of EBU participation for Member States that do not use the euro (centripetal effects); and (ii) the potential over the same time horizon for EBU to lead to disorderly break-up of the EU (centrifugal effects). On (1), EBU pushes the boundaries of legal technology with a view to maximising the functional equivalence between euro Member States, whose participation is compulsory, and the non-euro Member States that choose to participate in EBU via a close cooperation agreement. The early indications that some non-euro Member States do want to join EBU notwithstanding certain lingering differences between their position and that of euro area Member States provide an encouraging sign as to the value of those efforts. But whilst fair participation terms are necessary, they are not a sufficient precondition to the exercise of the option to participate in EBU. Each non-euro Member State will make its own wide-ranging political calculations on whether there are net welfare gains from EBU and in doing so will take due account of the policy preferences of private and public stakeholders, which may pull in different directions. The full extent of the centripetal effect of EBU is therefore hard to predict but it is certainly a new force to be reckoned with. On (2), the chapter reaches a cautiously optimistic prognosis. The legal safeguards in EBU to address disintegration risks are not a permanent solution to the problem of certain Member States being intent upon remaining outside deeper integration in the monetary and economic sphere but nor are they merely fleeting or stopgap measures. The chapter identifies compelling economic incentives for all Member States to make these safeguards work and to resist destructive behaviour.

Is my money safe at European banks? Reflections on the 'bail-in' provisions in recent EU legal texts

The ‘Banking union’, being created by the European Union (EU) comprises three linked projects: a Single Supervisory Mechanism (SSM) for banks, a single deposit insurance mechanism and a Single Resolution Mechanism (SRM) for failing banks. All three elements are introduced for the euro area and other Member States willing to participate. Under this resolution mechanism, private shareholders and creditors of a bank will be ‘bailed in’ (ie required to suffer losses) before (and as a precondition to) any ‘bail-out’ by the authorities, whether individual State governments or the €700 bn European Stability Mechanism (ESM).1 For institutional depositors and investors, this principle is uncontroversial: it is generally assumed that large and sophisticated corporates should have the capacity and motivation to monitor those they bank with. How far though does this bail-in concept extend? Are individuals and small firms also expected to take losses if their bank fails? The safety...

Cross-Border Production Chains and Business Cycle Co-Movement between Central and Eastern European Countries and Euro Area Member States

In this paper, we highlight the role of global value chains in the synchronization of economic activity between countries in Central and Eastern Europe (CEE) and the euro area. We start off by demonstrating that the degree of synchronization of the business cycles of CEE countries and their main trade partners from the euro area has increased in recent years. We next show that the cyclical fluctuations of GDP in CEE countries are strongly influenced by pro-cyclical movements of changes in inventories. We then present evidence of the importance of cross border production chains for the economies of CEE countries. We build on these findings to show that the propagation of changes in demand for imports along global supply chains — linked to technological requirements and inventory stock adjustments — contributes to the synchronization of economic activity across Europe. We also show evidence that CEE exporters have started to set up their own value chains in the CEE region.

When Does it Pay to Tax? Evidence from State-Dependent Fiscal Multipliers in the Euro Area

The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004-2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects.

Rola depozytów gospodarstw domowych w stabilizowaniu finansowania instytucji kredytowych strefy euro

The paper presents the results of empirical research on the stability of household deposits lodged in the monetary financial institutions (MFIs) of euro area member states in the period 2006–2012. Its aim is to assess the effectiveness of liquidity regulations based on the common European standards (norms: LCR and NSFR). The paper presents the differences in the ability of the countries to accumulate the deposits which, in the opinion of the supervisory authorities, can guarantee the funding stability of the analysed entities under both normal and stressed conditions. It reveals geographical variations in household preferences regarding the duration and value of invested resources and also shows the diversity in the impact of the stages of the financial crisis on the changes in the value of the deposits taken by the Eurozone’s MFIs.

Governance, Institutional Quality and the Euro Area Crisis: What Lessons to East Asian Integration?

1. IntroductionEver since the euro area crisis began in 2009, various reforms of economic governance system have been in progress.1 Almost all proposals for the reform of EMU governance have been aiming for strengthening fiscal and budgetary austerity and implementing the 'monetarist' view that emphasized a strong institutional framework. In addition, a new governance system such as banking and fiscal union has been proposed, but not activated.However, there are several issues to be further explored in the process of triggering structural reforms of EMU governance. The first issue is to what extent the euro states and other members of the EU should deal with conflicts between the pro-Europeans and euro-sceptics, both at national and European levels. The pressure to reconcile these conflicts in reshaping the governance architecture in the euro area is intense, fuelled by the euro area crisis. Studies that investigate this issue will inevitably have to deal with political decision making process: how politics affect the choices of governance measures to yield certain economic performance, which could differ from ones that come out from other political choices on governance measures.The second issue is that structural economic reforms typically taken in a currency union may not be sufficient to narrow growing imbalances and diverging trends in competitiveness, and converge economic cycles within the euro area. For example, the latest revision of fiscal policy governance is simply strengthening fiscal rules of the Stability and Growth Pact (SGP). The new rule demands that the annual structural budget deficit should not exceed 0.5% of nominal GDP, and contains an automatic correction mechanism that is triggered in case of deviation. However, the rule cannot solve the fundamental problems unless the origin of large budget deficits is identified and corrected. More generally, we should explore why economic performance is so different among member states.In this paper, we explore the data of institutional quality for the second issue. We find that institutional qualities of individual member nations were highly and significantly correlated with their economic performance in the euro area. We conclude that it is important to upgrade institutional quality of individual member nations as well as to narrow its heterogeneity among them.We also compare the governance system and quality of the euro area members with those of East Asian countries and draw policy implications for a regional integration in East Asia. We find that East Asia is far behind the Eurozone not only in institutional elements of the governance system at a regional level but also in institutional quality at the level of individual nations.The next section briefly reviews the literature on institutional quality and its relationship with economic performance, and discusses why institutional quality matters for maintaining a single currency area. Section 3 illustrates the data for institutional quality of the euro area member states and explores its close relationship with economic performance. Section 4 examines the data of institutional quality for East Asian countries and discusses policy implications for regional integration in East Asia. The final section concludes.2. Why Does Institutional Quality Matter for a Currency Union?2.1 Institutions and economic performanceNorth (1990) defines institutions as the rules of the game in a society or more formally as the humanly devised constraints that shape human interactions. In consequence they structure incentives in human exchange, whether political, social, or economic. The major role of institutions in a society is to reduce uncertainty by establishing a stable structure of human interactions. Institutions affect the performance of the economy by their effect on the costs of exchange and production. (pp. 3-6)2When property rights are not well secured, incentives and opportunities to invest and innovate will be reduced. …

Current account imbalances in the euro area

While the current account balance for the euro area as a whole has been in balance, divergences in current account positions among the euro-area members have widened since the introduction of the common currency euro. During the last 13 years Portugal, Greece and Spain have run large and persistent current account deficits, whereas Luxembourg, the Netherlands, Finland or Germany have displayed during the same period large and persistent surpluses. However, there is no unambiguous agreement among economists, whether this divergence of current account positions of the euro-area countries mirrors growing intra-euro-area imbalances (Gros, 2012) or just reflects proper functioning of the European integration process (Schmitz and von Hagen, 2009). Therefore, the aim of this paper is to estimate equilibrium current account position for each of the original 12 euro area countries so that it is possible to assess whether the divergence of intra-euro current account balances could be explained on the basis of economic fundamentals or it just reflects misallocation of resources and thus macroeconomic imbalances. The equilibrium current account balance is estimated using a panel-econometric technique for a sample of 30 industrial countries, which represent euro-area member states and their main business partners, over the period 1993–2011. Economic fundamentals affecting the equilibrium current account position are selected on the basis of the saving-investment balance, the trade balance and the net income balance, to ensure that we take into an account all theoretically important explanatory variables. We find that the main determinants of current account norms in our sample are fiscal balance, a country’s net international investment position, oil balance and a country’s stage of economic development. The major part of the euro-area countries exhibits current account positions close to their equilibrium levels with the exception of the Netherlands and Finland which have persistently higher surpluses, while Portugal and Greece run larger current account deficits than is their norm.

Fiscal Integration in the Eurozone: Economic Effects of Two Key Scenarios

The 2008-09 crisis has shown that some euro area member countries were unable to sufficiently stabilize their economies which has given rise to a debate about deeper fiscal integration in Europe. In this paper, we analyze the redistributive and stabilizing effects of two scenarios of fiscal integration in the Eurozone, namely the introduction of i) a joint tax and transfer system that replaces 10 per cent of national systems and ii) a system of fiscal equalization that equalizes 10 per cent of differences in taxing capacity. Based on the European tax-benefit calculator EUROMOD and representative household micro data for the current 17 euro area member states, our conceptual experiment shows that a joint tax and transfer system would only lead to moderate gains in terms of stabilization while redistribution would flow especially towards the Eastern European member states. In contrast, a fiscal equalization mechanism that redistributes revenues across countries could even lead to destabilizing effects.

Export Potential of SMEs and Euro Adoption in the Czech Republic

1. Introduction The Czech Republic is currently one of Members States with a derogation relating to euro adoption. Each member state may, at its discretion, set euro area accession date. What have official visions relating to Euro adoption been in Czech Republic so far? The draft strategy for euro area accession of 2002 talks about preparations so as to rule out year of 2007. The Government-approved Accession strategy of 2003 mentions period of 2009-2010 that was later specified to 1 January 2010. In October 2006, Government of Czech Republic decided to annul original plan of euro area accession in 2010. The new date has not been set, not even in Updated Strategy of 2007. The existing debt crisis of certain euro area member states leads to scepticism in respect of single European currency. This results in a cautious position of euro area non-member states with regard to replacement of their respective national currencies with euro. Marsh (2011) indicates causes of distrust are the pressures on EMU's existing membership (p. 4) and concludes that the enlargement of euro area has more or less ground to a halt (p. 288). The euro area enlargement is not very likely in near future. However, by joining European Union in 2004, Czech Republic automatically undertook to take part in third stage of formation of Economic and Monetary Union as well--i.e. to accept a single European currency. The commitment to adopt (sooner or later) euro still remains. The objective of this essay is to explore, what impact may be expected from euro adoption on exports of small and medium sized enterprises (SMEs 2). The first part mainly explains general impact of a common currency adoption on exports of companies (trade and its component, Rose Effect). The second part specifically addresses SMEs in Czech Republic. The essay relies on existing literature dedicated to expected impacts of a monetary union accession. With regard to general theoretical literature, this namely concerns Baldwin, Wyplosz (2006) and De Grauwe (2007). The effects of a single currency on mutual trade of monetary union members are discussed in a number of papers. The primary one is study entitled One Market, One Money (Commission, 1990). Furthermore, it namely concerns working papers of European Central Bank (e.g. Mongelli, Vega, 2006). The consequences of ten years of euro existence are summed up in European Commission study EMU@10 (EC, 2008). The expected impacts of monetary integration on Czech companies are namely discussed in analysis of Ministry of Industry and Trade (2006) and Lacina et al. (2008). 2. Impact of Single Currency Introduction on Exports One of expected benefit of a single currency adoption will be stimulation effect on international trade (so-called trade effect): [...] we review recent empirical research and endorse two conclusions: monetary do promote trade between their members but do not reduce bilateral trade between their member states and countries outside such unions (Begg et al., 2003, p. 5). Utilization of euro instead of existing national currency brings about two changes in foreign trade within trade with euro area (see De Grauwe, 2007, p. 77): 1) Certain transaction costs are eliminated, especially those associated with foreign currency management--e.g. conversion of foreign currencies, increased payment system costs associated with use of foreign currencies, costs associated with administration of other accounts (i.e. foreign exchange accounts), costs arising from more complex bookkeeping of foreign currencies, etc. The disappearance of aforementioned costs promotes competitiveness and stimulates exports. 2) The exchange rate risk and costs associated with mitigation thereof disappear. …

An Institutional Law Presentation of the European Stabilization Mechanism (ESM) as an Economic Crisis Financial Assistance Instrument

EFSM and EFSF were temporarily established for preventing any Euro area Member State’s insolvency. The ESM is a permanent mechanism which has common features with the ad hoc mechanism for Greece and the EFSM/EFSF. The purpose of this paper is to assess the effectiveness of ESM as a crisis management mechanism from a law perspective. The comparison between ESM and EFSM/EFSF serve as the basis of this assessment. The paper examines the legal foundation of ESM and the legal nature of the mechanism and presents the decision making process and the actors involved. The new legal basis prescribes that the ESM is activated only when the financial assistance is indispensible for the stability of the euro area as a whole and that the financial assistance is attached to strict conditionality. The contribution to the capital is made by the Euro area Member States, the financial assistance is conditional on a macro-economic adjustment programme and the terms are non-concessional. Although the ESM has a legal basis on European Law it has the legal form of an intergovernmental organisation. The judicial review of ESM was assigned to the European Court of Justice.

Should the Economic and Monetary Union Be Democratic After All? Some Reflections on the Current Crisis

During the past months the European Council agenda has been dominated by Europe's economic crisis, which combines elements of banking crisis in the euro area and individual Member States' debt crisis – and has turned into something of an existential crisis for the Union as a whole. Many questions concerning the Union's legitimacy have been raised in the context of the current debates pointing out how the role of democratic institutions has turned blurry while market pressure has been tackled in quickly developing institutional structures by taking fast decisions on major economic commitments involving a tightened belt both for those receiving the aid, and for those giving the necessary guarantees required by the creditors. As the crisis has evolved, these questions have become more or less fundamental in nature since they have increasingly encompassed the trust in the possibilities of the Union to manage the crisis through its own decision-making. But at the same time, crises also bring about potential for change.

The Euro Crisis: Mission Accomplished?

The Euro Crisis: Mission Accomplished?

Fiscal Policy Stance in the European Union: The Impact of the Euro

In the recent years there has been an intense discussion whether the actual behaviour of fiscal authorities is consistent with cyclical stabilization objectives. The question of the appropriate fiscal policy is gaining recognition especially for the countries of the euro area after entering the European Monetary Union (EMU). Therefore, the aim of this paper is to evaluate the activity of the fiscal policy before and after the entrance to the euro zone for each individual EMU country in 1995–2010 period. For this purpose we will use the cyclical adjusted balance, which is the common tool used to estimate fiscal policy stance. The analysis of the cyclically adjusted balance gives an additional insight into the former activity arrangements of the fiscal policy, which contributes to gauge the ex-post estimation of the fiscal policy. On this base we can determine the causes of general government budgets imbalance in the past. Despite this fact, we should be aware of some caveats in the assessment of cyclical adjusted balance, which appear due the inconsistency in measurement of output gap and potential GDP growth.To evaluate pro-cyclical or countercyclical fiscal policy stance we compare the dynamic evaluation of the cyclically adjusted balance and output gap. Namely, changes of the cyclically adjusted balance in consecutive years indicate the orientation of fiscal policy, i.e. the fiscal impulse. By comparing the change in the cyclically adjusted balance and output gap between individual years, which indicates fluctuations in the economic cycle, it is possible to assess the orientation of fiscal policy, i.e. the fiscal position. The fiscal policy can be considered as countercyclical if it is expansive in the situation of negative output gap and restrictive in the situation, when the actual growth of GDP is above its potential rate. On the other hand, fiscal policy is characterized to be pro-cyclical if in the situation of negative output gap the government uses restrictive fiscal instruments and when the fiscal policy reacts expansionary in the situation of positive output gap, where the actual output exceeds the estimated potential GDP.In the empirical analysis we evaluate the fiscal policy stance for each country of the euro area. In the assessment of government behaviour we cover 14 countries in the 1995–2010 period. The results of the analysis generally confirm that the fiscal policy in most euro-area member states became more expansionary in the period after entering the EMU. Moreover, these preliminary findings were partly confirmed by a statistical analysis which shows statistically significant differences in expansionary fiscal policy between the aforementioned sub-periods. In addition, we might also conclude the average fiscal stance is expansionary when actual output is above its potential level, which implies a pro-cyclical bias in times of prosperity, and that the fiscal stance tends to be predominantly counter-cyclical when actual output is below its potential level. These conclusions can be associated with asymmetric fiscal behaviour after entering the euro area because the response of fiscal authorities to cyclical conditions in the economy depends on whether good or bad times are prevailing. These assertions reflect some conclusions made in other similar studies. DOI: http://dx.doi.org/10.5755/j01.ee.24.1.1614

The ESM and the European Court's Predicament inPringle

On 27 November 2012, the European Court of Justice (“the Court”) rendered its judgment in thePringlecase. Sitting as a plenum, which is extremely rare, the Court did what had been expected. Just as theBundesverfassungsgericht(German Federal Constitutional Court orBVerfG) had done two months earlier, it gave the go-ahead for the euro area's permanent emergency instrument, the European Stability Mechanism (“ESM”). With this decision, the possibility of granting assistance to financially distressed euro area Member States has now been secured for the future.

Cruelty and Austerity. Philip Hallie’s Categories of Ethical Thought and Today’s Greek Tragedy

In this paper, 20th-century ethicist Philip Hallie’s research on cruelty is outlined and explained in order to determine and discuss categories of thought that make cruelty attributable to social forms of agency. The semantic ambiguity of “cruelty” and its cognate “cruel” are acknowledged and also discussed, but Hallie’s understanding is upheld nonetheless as technically articulate and, above all, as reasonable. As such, his understanding can be utilised to interpret and assess in ethical terms the recent austerity policies pursued in many countries of the world after the 2008 economic crash, which was induced by unsustainable deregulated trade of financial assets, particularly of toxic assets. The case of Greece is examined as exemplary, referring especially to the Loan Agreements of May 2010 between the representatives of the Greek State and those of the Euro-area Member States under the aegis of the International Monetary Fund.

Legal developments in the Economic and Monetary Union during the debt crisis: The mechanisms of financial assistance

The Union and its Member States have given a double response to the sovereign debt crisis: the creation of mechanisms of assistance and the strengthening of economic governance. Both responses have contributed to substantially redesign the architecture of the economic and monetary union. This article focuses on the mechanisms of assistance - most of which have been agreed intergovernmentally outside the EU Treaties -, describing them and examining their most significant legal implications. These are their compatibility with the no bail-out clause, the limited revision of the Treaties to include new Article 136(3) TFEU, the use of Article 122(2) TFEU as the only legal basis under the Treaties to provide financial assistance, the relationship between the intergovernmental mechanisms of assistance and the law of the Union and the judgment of 7 September 2011 of the German Constitutional Court on the compatibility of mechanisms of assistance with the German Constitution. Mechanisms of assistance are presented as part of an unavoidable process of further integration of the Member States that share a common good, the euro, a process that might lead to fundamental changes in the EU Treaties, including the creation of a European Treasury, that would go hand by hand with a fiscal federation where budgetary sovereignty of euro area Member States would yield to supranational control.

Money demand in the euro area: new insights from disaggregated data

Conventional money demand specifications in the euro area have become unstable since 2001. We specify a money demand equation in deviations of individual euro area Member States variables from the euro area average and show that the income elasticity as well as the interest rate semi-elasticity remain stable. The corresponding deep parameters of the utility function have not changed. Aggregate money demand instability does therefore not result from altered standard factors determining the preference for holding money. Instead, other factors determine the aggregate monetary overhang. Since monetary developments cannot easily be explained by changing preferences, they should be closely monitored and might be a sign of imbalances.

Boom-Bust Cycles, Imbalances and Discipline in Europe

The fallout from the 2008 financial crisis has been particularly acute in the euro area Member States of the south-western rim and in the new EU Member States, due to their previously accumulated macroeconomic and financial imbalances. The perception that the euro environment provided a solid shield against economic instability shaped the incentives, expectations and actions of agents, markets and policymakers. This, in turn, eroded discipline at all levels: EU-wide surveillance, domestic policies and markets. The empirical analysis of this paper, focused on market discipline, shows that before the crisis credit risk premia neglected fiscal imbalances and hardly reflected external or financial imbalances, in particular in advanced economies. This result is partly explained by the masking effect of the expansionary phase on underlying imbalances. The crisis has shattered the perception of the euro as a safe haven for economic stability, where imbalances do not matter. Moreover, the severity of the crisis has uncovered the fragilities of the institutional framework underpinning the euro and is leading to its reinforcement by means of stronger economic governance and surveillance. Going forward, however, a further two factors may exert a greater impact on the future discipline and stability of the European economies: i) more stringent financing conditions by markets, contingent on fundamentals, although there are doubts on the persistence of this discipline in future expansionary phases; and, above all ii) domestic policymaking conduct that is consistent with the constraints that EMU entails. These three forces could settle the European integration process and EMU on a more solid footing, although the jury is still out.

The EU Architecture to Avert a Sovereign Debt Crisis

This paper analyses what has been the EU institutional reaction to the Euro-area sovereign debt problems, focusing in particular on the new architecture designed to avert a financial crisis. It analyses i) the European Financial Stabilisation Mechanism (EFSM), an EU financial assistance feature available to all 27 member states; ii) the European Financial Stabilisation Facility (EFSF), a temporary credit-enhanced Special Purpose Vehicle (SPV) with minimal capitalisation created to raise funds from the capital markets (via an investment grade rating) and to provide financial assistance to distressed euroarea Member States (EAMS) at comparatively lower interest rates; and iii) the European Stability Mechanism (ESM), an intergovernmental organisation under public international law. Finally, some concluding remarks are provided.

Fiscal Federalism: US History for Architects of Europe's Fiscal Union

European debates on reform of euro-area fiscal governance frequently refer to fiscal federalism in the United States. In light of the ‘fiscal compact’, agreed by the European Council in 2011, this volume reviews US fiscal federalism from Alexander Hamilton to the present. It is important to note that the US federal government neither mandates balanced budgets nor bails out states in fiscal trouble. States adopted balanced budget rules during the nineteenth century and these rules limit debt accumulation. Before introducing such ‘debt brakes’ for euro-area member states, however, Europeans should consider that they are likely to be more effective when ‘owned’ locally rather than mandated centrally, and that maintaining a capacity for countercyclical macroeconomic stabilisation is essential. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify bank regulation and restructuring. C. RANDALL HENNING is Professor of International Economic Relations at American University and a Visiting Fellow at the Peterson Institute for International Economics in Washington DC. His work examines economic integration in Asia and Europe, multilateral financial institutions, and macroeconomic and exchange rate conflict and cooperation among G20 countries. MARTIN KESSLER is a Research Analyst at the Peterson Institute. He holds a Masters degree from the Paris School of Economics, and previously worked as a research assistant at Bruegel, and an economic analyst at the French embassy in Berlin.